Why boards are getting Bitcoin wrong

19 Mar, 2018

In Australian boardrooms I often hear Bitcoin compared to the tulip bubble. But the comparison is factually wrong - and there’s a number of other reasons why boards can’t dismiss Bitcoin as a pure bubble.

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Many directors I speak to talk about Bitcoin as if it’s just another tulip bubble, but I think this perspective is factually wrong. Whilst it may be overvalued in the short term, Bitcoin (and other cryptographic currencies) are not a fad, and should not be dismissed so readily.

In less than two years Bitcoin has gone from A$400 to A$4,000 to over A$14,000 a coin. While two or three other major currencies are emerging, Bitcoin is way out in front at over $180 billion market capitalisation, compared to $40 billion for the second place getter, Ethereum.

Many don’t understand Bitcoin - is it a commodity or actual currency? In my mind, Bitcoin is like gold. It’s valuable because it’s scarce, and its scarcity is built into the software that it sits on.

Only 21 million Bitcoins will exist, and about 16 million of these are already available. Just like gold, there isn’t an abundant supply of Bitcoin. The software limits the release of new coins by a process called mining. Much like mining with a pick and shovel, it takes electricity, effort and time to generate new coins in what is essentially a cryptographic puzzle.

Bitcoin is also rare because it’s not able to be copied even though it’s a digital property. It’s been created on clever technology that makes this impossible. As more transactions occur in Bitcoin and it becomes even more scarce, demand increases and so does its value.

Even though Bitcoin is a scarce resource it’s becoming more common as a means to store value and transact. It, along with other cryptographic currencies, allow people to conduct transactions safely with an unknown party at a distance. This has enabled drug traders and others on the dark web to transact without identity, and is used in countries with restricted currency controls to protect investments. Bitcoin holders can transact safe in the knowledge that they essentially have a coin in their pocket - it's like cash.

The sheer number of people that are now involved in Bitcoin around the world has passed a tipping point - there are now even Bitcoin ATMs. Bitcoin is quickly becoming mainstream and a legitimate part of our financial exchange system. It’s an independent currency or means of exchange that is not controlled by a reserve bank. I believe Bitcoin will become a very efficient form of currency, and soon reserve banks of the world will look at creating their own form of cryptocurrency.

As more people use Bitcoin for standard commercial purposes, the more it will take hold. Bitcoin is an efficient way to transfer and store value, and more people are realising its value. Regardless of the short term volatility, Boards that ignore or dismiss Bitcoin and cryptocurrency as just another fad will do so at their peril.